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CHAPTER 1

$$. $$. CHAPTER 1. INTRODUCTION TO ENGINEERING ECONOMY. $$. $$. WHAT IS ECONOMICS ?. The study of how limited resources is used to satisfy unlimited human wants. WHAT IS ECONOMICS ?.

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CHAPTER 1

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  1. $$ $$ CHAPTER 1 INTRODUCTION TO ENGINEERING ECONOMY $$ $$

  2. WHAT IS ECONOMICS ? The study of how limited resources is used to satisfy unlimited human wants

  3. WHAT IS ECONOMICS ? The study of how individuals and societies choose to use scarce resources that nature and previous generations have provided.

  4. LAND All gifts of nature, such as: water, air, minerals, sunshine, plant and tree growth, as well as the land itself which is applied to the production process.

  5. LABOR The efforts, skills, and knowledge of people which are applied to the production process.

  6. CAPITAL • Real Capital (Physical Capital ) • Tools, buildings, machinery -- things which have been produced which are used in further production • Financial Capital • Assets and money which are used in the production process • Human Capital • Education and training applied to labor in the production process

  7. What is Engineering Economy? • Economic decision making for engineering systems is called engineering economy. This definition may seem restricted to engineering projects and systems only, engineering economy however is also the study of industrial economics and the economic and financial factors which influence industry. • Engineers are the people who are familiar with all the technicalities of machinery and production therefore they are the best judges of the useful lives of an asset and they also have the technical knowledge to calculate the number of units a proposed plant would produce when operational. • In today’s competitive world of business it has become essential that engineers should practice financial project analysis for engineering projects and make rational decisions. • Engineering economy also includes the study of accounting practices for manufacturing concerns. Unique features of accounting for manufacturing concerns are process costing, batch costing, cost allocation.

  8. Engineering economy deals with justification and selection of projects. Many engineers work on projects which address a specified activity or a problem. Any decision regarding the project must be justified. • In business environments, many if not all, decisions are justified using monetary criteria such as “profit”. Such decisions are made at the managerial level and many engineers become managers in manufacturing environment. • Therefore, all engineers, regardless of their employment, should know methods and tools used in evaluation of projects. • The purpose of engineering economy is to expose all engineering students to the methods which are widely used for evaluation of projects. • Even though, engineering economy deals mostly with selection of projects in business environment, the tools and methods can be and are used by individuals and non-profit organizations such as government, hospitals, and charitable entities, etc.

  9. SOME EXAMPLES Let us present few examples in different environments where engineering economy can facilitate the decision making process. • Business Environment: A small manufacturing company needs to buy a forklift truck for material handling. Two different brands, say A and B, are being considered. Which truck should be bought? The decision will probably be based on minimization of cost. • Non-profit Organizations: A project for widening a two lane highway to four lanes is being considered by the county board. A four lane highway may reduce the traffic accident rate but is expected to lower property values in the immediate neighborhood of the highway. Should the proposed highway be built? The county board must weigh the relative benefit of lower accident rates against the possible loss in value of homes as well as the construction cost. • Individuals: A new college graduate needs a new car. Should this new car be bought or leased? Methods from engineering economy can be used for determining the best choice.

  10. Economic factors are as important as regard for the physical laws and science that determine what can be accomplished with engineering. The following figure shows how engineering is composed of physical and economic components: • Physical Environment: Engineers produce products and services depending on physical laws. Physical efficiency takes the form: System output(s) Physical (efficiency) = ------------------------- System input(s) • Economic Environment: Much less of a quantitative nature is known about economic environments -- this is due to economics being involved with the actions of people, and the structure of organizations. • Satisfaction of the physical and economic environments is linked through production and construction processes. Engineers need to manipulate systems to achieve a balance in attributes in both the physical and economic environments, and within the bounds of limited resources.

  11. Following are some examples where engineering economy plays a crucial role: • Choosing the best design for a high-efficiency gas furnace • Selecting the most suitable robot for a welding operation on an automotive assembly line • Making a recommendation about whether jet airplanes for an overnight delivery service should be purchased or leased • Considering the choice between reusable and disposable bottles for high-demand beverages • With items 1 and 2 in particular, note that coursework in engineering should provide sufficient means to determine a good design for a furnace, or a suitable robot for an assembly line, but it is the economic evaluation that allows the further definition of a best design or the most suitable robot.

  12. PRINCIPLES OF ENGINEERING ECONOMY 1. Develop the Alternatives; 2. Focus on the Differences; 3. Use a Consistent Viewpoint; 4. Use a Common Unit of Measure; 5. Consider All Relevant Criteria; 6. Make Uncertainty Explicit; 7. Revisit Your Decisions

  13. DEVELOP THE ALTERNATIVES The final choice (decision) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis.

  14. Example • Which Car to Lease?Saturn vs. Honda Defined the alternatives

  15. Financial Data Required to Make an Economic Decision

  16. FOCUS ON THE DIFFERENCES Only the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision.

  17. USE A CONSISTENT VIEWPOINT The prospective outcomes of the alternatives, economic and other, should be consistently developed from a defined viewpoint (perspective).

  18. USE A COMMON UNIT OF MEASURE Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier the analysis and comparison of alternatives.

  19. Financial Data Required to Make an Economic Decision

  20. CONSIDER ALL RELEVANT CRITERIA Selection of a preferred alternative (decision making) requires the use of a criterion (or several criteria). The decision process should consider the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner.

  21. CRITERIA • Want mechanical security • Want minimum total cash outlay

  22. Financial Data Required to Make an Economic Decision

  23. MAKE UNCERTAINTY EXPLICIT Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives and should be recognized in their analysis and comparison.

  24. CRITERIA • Mechanical security is uncertainty. Probably need more research

  25. Recognize a decision problem Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criterion to use Select the best alternative Need a car Want mechanical security Gather technical as well as financial data Choose between Saturn and Honda Want minimum total cash outlay Select Honda Which Car to Lease?Saturn vs. Honda

  26. REVISIT YOUR DECISIONS Improved decision making results from an adaptive process; to the extent practicable, the initial projected outcomes of the selected alternative should be subsequently compared with actual results achieved.

  27. ENGINEERING ECONOMY AND THE DESIGN PROCESS An engineering economy study is accomplished using a structured procedure and mathematical modeling techniques. The economic results are then used in a decision situation that involves two or more alternatives and normally includes other engineering knowledge and input.

  28. ENGINEERING ECONOMIC ANALYSIS PROCEDURE 1. Problem recognition, formulation, and evaluation. 2. Development of the feasible alternatives. 3. Development of the cash flows for each alternative. 4. Selection of a criterion ( or criteria). 5. Analysis and comparison of the alternatives. 6. Selection of the preferred alternative. 7. Performance monitoring and post-evaluation results.

  29. ACCOUNTING AND ENGINEERING ECONOMY STUDIES Modern cost accounting may satisfy any or all of the following objectives: 1. To determine the cost of products or services 2. To provide a rational basis for pricing goods or services 3. To provide a means for controlling expenditures 4. To provide information on which operating decisions may be based and the results evaluated

  30. Engineering Economic Decisions Manufacturing Profit Planning Investment Marketing

  31. Accounting Vs. E E Evaluating past performance Evaluating and predicting future events Accounting Engineering Economy Past Future Present

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